Forensic Accounting

There are several common financial tracking documents which an accountant should obtain when seeking to ascertain whether a party's assets and/or income are being distorted or are being intentionally hidden.

Obtaining large or unusual checks can provide useful information to a forensic examiner. An examination of the back of checks negotiated by the suspect party or subject business may show unknown bank accounts being used by the party or business. Payroll checks, for instance, may show a spouse’s money being funneled through an employee. In addition, hidden liabilities and assets may be found by obtaining a credit report. A credit report which contains joint information can be obtained by either spouse; however, bear in mind that it is illegal to obtain or use an unauthorized credit report. Obtaining loan and leasing applications, prior divorce decrees, tax returns, and W-2s for the party oftentimes also provides useful information. With W-2s, specifically, examine each of the boxes as they contain important information regarding pension, deferred compensation, dependent care benefits, etc. From these documents, you should always attempt to determine whether the alleged income matches the lifestyle of the parties.

There are several business documents which can prove valuable in tracking assets or determining income. Comparative statements for as many years as possible can alert you to nonrecurring, unusual or extraordinary financial occurrences. The general accounts receivable and accounts payable ledgers of the business should be reviewed by your client for entries that appear out of the ordinary. Particular attention should be paid to the cost of goods sold, repairs, outside services and expenses of the business. In addition, be sure to obtain any buy/sell agreements adopted by the business. Finally, attempt to determine whether personal expenses of the party are being paid by the business.

Any business documents obtained should be reviewed to determine whether the business is utilizing an accrual or cash basis of accounting since that may significantly alter income. For example, a business using the accrual basis of accounting can manipulate both its income and assets by simply making a journal entry that adjusts its accounts receivable. Other adjustments to income or irregularities hidden in the journal entries may also be discovered.